The Center for Responsible Lending considers most auto loans to be at least potentially “abusive,” because in the center’s view, dealerships have a vested interest in hiking customer interest rates, to earn more dealer markup on loans.
But in a press briefing on Monday, the consumer advocate group at least acknowledged that what it considers “responsible” auto loans can have a positive effect on low-income households that need a car to get to work. A “responsible” loan, according the CRL, would be one with no dealer mark-up. Very few loans fit this description.
“Auto loans are a great example where a responsible loan is really beneficial,” said Sarah Wolff, senior researcher for the center, and author of a new report, “The Cumulative Costs of Predatory Practices,” which the center published today, in connection with a panel discussion today in Washington, “The State of Lending in America and its Impact on U.S. Households.”
The CRL report calls the costs to poor households “cumulative,” because consumers who take out potentially abusive loans, such as payday loans, are highly likely to suffer the effects of other kinds of abusive loans. The combination can create a “waterfall” effect, Wolff said.
For instance, a hypothetical family defaults on a mortgage that was unaffordable in the first place. The customer’s credit score falls, which makes their next auto loan that much more unaffordable. In another common occurrence, consumers find themselves paying high overdraft fees because they wrote a check they couldn’t cover, to repay a payday loan, Wolff said.
It’s no surprise that the report is critical of auto lending. The Center for Responsible Lending is a harsh critic of dealer reserve, also known as dealer markup, and a strong supporter of the Consumer Financial Protection Bureau. The CFPB wants to eliminate dealer discretion in setting dealer reserve, since according to the CFPB dealer discretion results in higher rates for legally protected classes, especially minorities.
Not incidentally, part of the CFPB’s mandate is to police what it calls “Unfair, Deceptive or Abusive Acts or Practices,” or UDAAPs for short. That makes “abusive” a loaded term in regulatory circles.
